Takata Can Extend Airbag Lawsuit Freeze for Individuals

The Delaware bankruptcy judge presiding over the Takata case on Monday granted the debtors’ request to extend the freeze on lawsuits connected to its dangerously defective airbag inflators through late February for individual claims, but will revisit a stay on state enforcement actions in 30 days.

During a hearing in Wilmington, Delaware, U.S. Bankruptcy Judge Brendan L. Shannon extended the pause in litigation he originally approved in August that he said essentially “wraps the automatic stay around” Takata’s automaker customers that are funding the case, finding there was a “meaningful prospect of irreparable harm” to the debtor if the individual suits were to proceed.

Takata’s automaker customers — called “original equipment manufacturers” in the case and consist of major industry players like Toyota Motor Corp., Ford Motor Co. and Honda Motor Co. Ltd. — are providing the debtor with an unusual form of post-petition financing by forgoing payment rights to free up an estimated $300 million in liquidity to keep the company afloat to make replacement airbag inflators for the massive recall related to defective devices linked to more than a dozen deaths and scores of injuries.

The potentially billions of dollars in liability from wrongful death, personal injury and economic loss claims, and the subsequent recall of vehicles with Takata airbags installed — the largest in U.S. history — sparked the Chapter 11 case, and the debtor argued that it needed a respite from the litigation in order to focus on its global restructuring that is proposed to culminate with a $1.6 billion sale to competitor Key Safety Systems Inc.

On Monday, Judge Shannon said that Takata had shown that ongoing litigation could endanger the company’s restructuring plans and that an additional 90-day stay would be “less burdensome” on the lawsuit claimants than on the debtor.

“Failure of the restructuring frankly poses a significant risk to all stakeholders,” the judge said from the bench.

Like his ruling in August, the litigation freeze does not extend to the multidistrict casebased in the Southern District of Florida, and essentially extends the powers of the Chapter 11 automatic stay, which halts collection efforts and lawsuits against a debtor, to other defendants in the cases.

The order was “effective immediately” and runs through Feb. 27 for individual plaintiffs, but state enforcement actions were another matter.

Hawaii, New Mexico and the U.S. Virgin Islands had objected to the extension on grounds their actions fall under an exception for government police powers.

Counsel for the states and territory had based some of their arguments on state sovereignty being impinged by a federal court, something Takata argued wasn’t enough to enough to block its extension request.

Representing Hawaii and the U.S. Virgin Islands, Mimi Y. Liu ofMotley Rice LLCsaid that Takata’s argument for staying the state actions were “relatively thin” in August and were now “thinner,” with no showing there was imminent harm rather than just a speculative risk.

Liu said the states weren’t looking for anything extraordinary, essentially a litigation plan that involves deposing “mid- to upper-mid-level” engineers, and not a gambit to, as Takata argued, “unleash the awesome powers of the state.”

“No one can articulate what those awesome powers are or how they could be unleashed,” she told Judge Shannon. “We are willing to stipulate what will happen in the next 90 days with great specificity.”

Judge Shannon ruled that applicable case law does allow him to stay the state actions, but limited that halt to 30 days so the government entities could define the boundaries of what they intend to do, “in order to permit parties to negotiate what to expect.”

At the end of that period, the court would revisit the issue and the state actions might be able to go forward.

Several individual claimants had also opposed the extension, but the official committee of tort claimants remained neutral.

Committee attorney Laura Davis Jones of Pachulski Stang Ziehl & Jones LLP said the tort claimants were relying on representations by Takata and the automakers that they would work with individual hardships as needed, something Judge Shannon said he “expected” to happen during his ruling.

Takata filed for Chapter 11 protection in June after pleading guiltyto one count of wire fraud in February. As part of the plea, the company agreed to pay a $25 million criminal penalty, $125 million to people who were harmed or will be harmed by a malfunctioning Takata airbag inflator, and $850 million in restitution to automakers.

Takata’s parent company has also sought equivalent relief in Japan, known as a civil rehabilitation, and received Chapter 15 recognition in the U.S. last week.